Understanding the New Battle Over Net Neutrality

Update: After much Sturm und Drang and rumors of changes over the past few days, the FCC voted (3-2, with the Democratic commissioners all in favor and the Republicans opposed) to move ahead with proposed new rules along the lines described below. This kicks off a public comment period that will end in July, meaning that this debate is really only just getting started.

The Federal Communications Commission is expected to issue new proposed rules this week on “network neutrality,” the principle that broadband Internet service providers can’t discriminate among the content that runs through their pipes. Early indications are that it will be an Animal Farm sort of net neutrality, with some nets more neutral than others. FCC Chairman Tom Wheeler promised recently that his agency “will not allow some companies to force Internet users into a slow lane so that others with special privileges can have superior service.” But the rule seems likely to allow ISPs to cut deals with content companies to ensure that their packets get delivered smoothly — as Netflix reluctantly agreed to with Comcast in February and Verizon last week. Which by definition means they’re in a faster lane than others, doesn’t it?

At this point, you may be expecting me to launch into a thundering denunciation of this assault upon our rights as citizens of the Internet. That is, after all, what 90% of what’s written on this topic amounts to (the other 10% can be foundmostlyon the opinionpages of the Wall Street Journal). I, however, am going to give you something different: 11 things I learned about net neutrality while spending way too much time studying the topic over the past few days. I remain anything but an expert (and I ask the communications lawyers among you in particular to please point out any errors in the comments), but I thought a semi-neutral take on net neutrality might make for a nice change of pace this week.

1. The judges did it. The reason we’re having to suffer through this net neutrality discussion yet again is because three judges on the D.C. Circuit of the U.S. Court of Appeals (two appointed by Bill Clinton and one by Ronald Reagan) ruled in January that the previous set of “open Internet” (that’s what the FCC calls net neutrality) standards violated the law and the agency’s own rules. The problem, the court said, was that the FCC’s bans on blocking or discriminating against certain Internet traffic sounded like the kind of rules that would apply to a “telecommunications service,” yet the FCC has classified broadband internet as an “information service.” So while two of the three judges (the Clinton appointees) agreed that the FCC had the right to regulate broadband providers’ relationships with content providers (the FCC term is “edge providers”) even if it classified broadband as an information service, they didn’t think the agency had done it correctly up to now. The majority jovially encouraged the FCC to try again (“After all, even a federal agency is entitled to a little pride,” wrote Judge David Tatel), an effort that Chairman Wheeler hopes to launch at a Commission meeting this Thursday.

2. This “telecommunications” vs. “information” thing isn’t just technical minutiae. The terminology comes from the Telecommunications Act of 1996, but the concepts date back to the 1970s, when the FCC began to differentiate between basic telephone service and the cool new things people were beginning to do with computers over telephone lines. Telecommunications services are common carriers, expected to provide basic service on equal terms to all — and to let other businesses make use of their infrastructure to provide information services. These information services, the thinking went, were better left free to innovate and compete largely exempt from FCC regulation. In the early days of the consumer internet, the hundreds of competing dialup ISPs that piggybacked on existing phone lines fell clearly in the information services category. But in 1998, the FCC decided that the broadband DSL connections provided by telcos amounted to a telecommunications service. In 2002 the Commission switched course again and ruled that broadband access provided by cable TV companies was an information service — the reasoning being, in part, that cable broadband had ended the DSL monopoly and created a competitive market once again. This led to a zillion lawsuits from phone companies and other non-cable ISPs, but in 2005 the Supreme Court decided that the FCC was within its rights to make that call. After that, just to be fair, the FCC deemed DSL and other broadband services to be information services as well. But that hasn’t stopped cable companies from becoming the dominant providers of broadband access, with DSL a clearly inferior option and the much-anticipated buildout of fiber-optic networks by the telcos going more slowly than hoped.

3. It’s been a great decade to be a telecommunications lawyer. By classifying broadband as an information service, the FCC was effectively pledging to leave it alone. But when Comcast started blocking BitTorrent and other peer-to-peer sharing services because it said they were using too much bandwidth, the Commission jumped in and, in 2008, determined that Comcast’s behavior “unduly squelches the dynamic benefits of an open and accessible Internet.” Comcast sued, and the D.C. Court of Appeals (with Clinton appointee David Tatel writing the majority opinion there, too) ruled in 2010 that the FCC had failed to offer adequate justification in the law for its actions — it had basically just cited some vague exhortations from the Communications Act of 1934. By then Democrat Julius Genachowski, an avowed net neutrality fan, was in charge at the FCC. After floating a trial balloon about re-reclassifying broadband as a telecommunications service, the Commission decided instead to draw up a set of open Internet rules that it based on some less-vague exhortations in the Telecommunications Act of 1996. Verizon Communications challenged these in court, which led to the January Appeals Court ruling.

4. Republicans are from Comcast, Democrats are from Google. The pro-net-neutrality camp wants more regulation of broadband providers, which sounds like kind of a Democratic thing. But many of its members are convinced that this regulation is needed to preserve the Schumpeterian, creative-destructive free-for-all of the Internet, which sounds like something Republicans would be for. Also, dislike of the cable industry is a nonpartisan emotion: I would guess that if you asked Republican voters, “Should cable companies be regulated like electric utilities?” the most common answer would be, “You betcha.” And while a decade ago the entities on the side of net neutrality (the term is usually traced to a 2003 paper by Columbia Law School professor Tim Wu) were mostly cuddly little nonprofits and startups — and thus presumably endearing to Democrats — some are now multinational giants. Google has about the same revenue and profits as Comcast, and more than twice the market capitalization. So increasingly, this fight pits one set of gigantic capitalist entities that happen to be preferred by Democratic politicians against another set preferred by the Republicans. It didn’t start out this way: The Telecommunications Act of 1996, with its push for competition and lighter regulation, was a bipartisan effort. The 2005 Supreme Court dissent arguing that of course cable broadband was a common-carrier telecommunications service was the work of arch-conservative Antonin Scalia. The FCC chairman who went after Comcast in 2008 was Bush appointee Kevin Martin. Now, however, the rhetoric, the FCC votes, and even the court rulings are increasingly breaking down along partisan lines.

5. We’re on a slippery slope to a walled garden. Or something. On the face of it, the fact that Comcast and Verizon want Netflix, which accounts for 28% of all fixed-line Internet traffic in the U.S., to pay for some of that bandwidth it’s hogging does not seem all that alarming and unreasonable — unless you work at Netflix. The concern is what comes next. Mr. Net Neutrality himself, Tim Wu, writes that “bloggers, start-ups, or nonprofits” will “be behind in the queue, watching as companies that can pay tolls to the cable companies speed ahead.” That’s a bit rich — companies like Netflix and Google and Facebook already spend zillions of dollars ensuring that their content gets delivered more quickly and reliably that that of your average blogger, start-up, or nonprofit. They’ve just been spending it on server farms, undersea cables, and cloud services, not deals with ISPs. Yes, the companies with control over the “last mile” into consumers’ homes are in a special and uniquely powerful position, and there are reasons to suspect that the cable companies in particular would love to turn the freewheeling Internet into a “walled garden” of selected and paid-for content and to disadvantage those, like Netflix, who compete directly with their own offerings. There are also reasons to suspect that competitive forces and/or the FCC will stop them. There’s also the example of the mobile internet, which the FCC exempted from some of its open internet rules because there’s less bandwidth available and more direct competition. Smartphone screens definitely have a walled-garden aspect to them, but the vegetation has nonetheless grown pretty freely and riotously, and the chief gardeners have turned out to be Apple and Google — not the wireless phone companies.

6. That’s not the only slippery slope. The argument from the other side is that if the FCC succeeds in laying down strict rules on how broadband providers may interact with content providers, then that could bring all innovation and evolution in broadband to a halt. “An unwarranted government interference in a functioning market is likely to persist indefinitely, whereas a failure to intervene, even when regulation would be helpful, is likely to be only temporarily harmful because new innovations are constantly undermining entrenched industrial powers,” Judge Laurence Silberman (the Reagan appointee) wrote in his partial dissent to January’s Appeals Court decision. (Then, just to be snarky, Silberman supported his assertion with a quote from Tim Wu’s book The Master Switch: The Rise and Fall of Information Empires:“[J]udicial errors that tolerate baleful practices are self-correcting while erroneous condemnations are not.”) This reflects the standard conservative line on antitrust, which can be traced back to the University of Chicago Law School classroom of Milton Friedman’s brother-in-law, Aaron Director: monopolies may be bad, but competition usually wears them down, while government regulations are forever. Although of course in the FCC’s case, regulations only seem to last until the next Appeals Court decision.

7. An open Internet does seem like a good thing. There is widespread agreement among economists that the current open, modular nature of the Internet has stimulated innovation and growth. The debate is really over whether enforcing that openness by regulatory decree is necessary or even helpful. If Internet openness really is as great as it seems to be, one line of reasoning goes, then it will win out in the end anyway. The counterargument, made in economist Joseph Farrell and legal scholar Philip J. Weiser’s 2003 paper “Modularity, Vertical Integration, and Open-Access Policies,” is that if firms in gatekeeper positions such as broadband providers have monopoly power, they may do things that are in their own short-term interest yet reduce the overall economic value of the networks to which they provide access. American communications history offers some support for this contention: The first great U.S. communications network was the Post Office, which was run by the government. As historian Richard John tells it in Spreading the News: The American Postal System from Franklin to Morse, Congress gave itself the power to determine postal routes in 1792 and subsequently expanded the postal system much faster than any profit-seeking businessperson (or even halfway cost-conscious bureaucrat) ever would have. This legislative involvement has in recent years become the USPS’s Achilles heel, as Congress won’t allow it to cut back on activities that lose billions. But in the early days it was crucial to building the national economy, and the nation. In his subsequent book Network Nation: Inventing American Telecommunications, John makes the case that the next great communications network, the telegraph, expanded much less quickly as a private monopoly than it would have if inventor Samuel Morse had succeeded in getting postal authorities to take it over, as he initially hoped. And of course the one-time phone monopoly AT&T, while birthing all sorts of amazing innovations at its Bell Labs, was legendarily reluctant to give innovative competitors access to its customers.

8. Just because something is a good thing doesn’t make it the law. The big problem the FCC has faced in all its attempts to impose its open Internet ideas upon broadband providers is that Congress has never explicitly asked it to do such a thing. Over the past decade several bills have been proposed to rectify this lack of direction, but none have made it far. So the FCC has, as noted above, fallen back on a section of the Telecommunications Act of 1996 that directs it to take “measures that promote competition in the local telecommunications market or other regulating methods that remove barriers to infrastructure investment.” In its open internet rules, the FCC basically argues that preventing broadband providers from discriminating against certain content will stimulate demand for broadband, which in turn will stimulate more infrastructure investment. Not for nothing did Verizon’s lawyers refer to this reasoning as a “triple bank shot.” There was a time when such regulatory creativity was applauded in the courts, but that ended sometime in the 1970s. What’s interesting is that the January Appeals Court decision (and even the dissent) made clear that the FCC can expect little trouble from the courts if it takes actions that directly promote competition or remove barriers to investment. One such measure, which Chairman Wheeler has already promised is on the way, would be to preempt the despicable laws that at least 20 states have enacted (under heavy lobbying from the cable companies and telcos) to prevent municipalities from building their own broadband networks. But surely there’s much more the agency could do in that direction.

9. The most obvious solution may not be the solution. FCC could also just reclassify broadband providers as telecommunications services, giving it far more power to regulate their behavior. Chairman Wheeler has said this option is still on the table, but he doesn’t seem to be planning to make use of it anytime soon. Why not? My guess is that it’s some combination of (1) wanting to get some new broadband rules out quickly to fill the current regulatory void, which requires continuing on the same track rather than starting over on a new one, (2) fear of the legal and political blowback that would surely ensue, and (3) genuine belief that competition is a better solution to whatever might ail broadband than common-carrier regulation would be. If broadband were classified as a telecommunications service, for example, the law points toward a requirement that cable companies and telcos open up their broadband lines to rival providers of internet access. This could remove much of the incentive for companies to string new, even-broader-band lines into Americans’ homes. The FCC could then try to build in new incentives through regulation and subsidy, but that would obviously bring its own complications. In a very interesting petition filed with the FCC last week, the Mozilla Foundation (the people behind the Firefox web browser and some other stuff) proposed a middle ground of continuing to treat the relationship between broadband providers and consumers as an information service, but regulating the interactions between broadband providers and content providers as a telecommunications service. I have no idea if that would stand up to legal scrutiny, but I like the creativity.

10. Broadband internet service in the U.S. is … okay. As of 2012, the U.S. ranked 20th in the world in the number of fixed-line broadband connections per 100 people. This and other global measures of broadband penetration are often trotted out to make the case that this country is a terrible laggard in the field, but I’m not so sure of that — all but one of the nations ahead of it on the list are much smaller and more densely populated, and even the exception, Canada, has a population concentrated along its southern border rather than strewn all over as in the U.S. So the performance of broadband providers here seems neither brilliant nor dismal. And unlike in Europe, where economic troubles and budget cuts have curtailed broadband plans, the forecast for the U.S. seems to involve continued, if not exactly consistent, buildout — with Google Fiber and AT&T’s planned Ultra-Fast Fiber Network currently generating the most excitement. Interestingly, mobile broadband penetration in the U.S. ranks much higher, at ninth in the world. That could have something to do with it being easier to upgrade a small-town cell-phone tower than to string new wires to everybody in town, or it could be a reflection of a much more competitive market in wireless broadband than in the wired variety. Or both.

11. Cable companies are a long way from winning the hearts and minds of American consumers. The American Customer Satisfaction Index gives Internet service providers (the cable industry) a score of 65 for 2013 — the worst of any industry tracked — with hoping-to-merge giants Time Warner Cable and Comcast at even more dismal scores of 63 and 62, respectively. Subscription television services (the cable companies plus the better-liked satellite and telco providers) get a slightly better rating of 68, with Comcast at 63 and Time Warner Cable at 60. Electrical utilities, by contrast, score a perfectly respectable 77. The public sector rates a weak-although-still-better-than-cable 68, the much-criticized airlines score 69, and health insurers come in at 73. There’s no ranking for newspapers in 2013, although in some past years they’ve done even worse than cable. Interestingly, both newspapers and cable for decades followed the same simple business strategy: (1) acquire a local monopoly, (2) squeeze the greatest possible profits out it. In a generally admiring account of the rise of cable pioneer John Malone in his book The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, Will Thorndike describes how Malone starved his cable systems of resources because he “saw no quantifiable benefit to improving his cable infrastructure.” It was only the arrival of competition from satellite TV in the mid-1990s that changed his tune. Malone was (and is) an extreme case, but in general pleasing customers and pursuing technological innovation don’t really seem to be in the cable providers’ DNA. Given that, it’s actually pretty remarkable how much they’ve accomplished in broadband over the past decade. Going forward, though, the question is whether the cable industry’s history should lead us to fear what it might do to the Internet — or chuckle at its hopes of outmaneuvering the likes of Amazon, Apple, and Google.

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